Q&A With Ken Hicks, CEO of Foot Locker, Inc.

If you were to ask Ken Hicks what he does for a living, he’d tell you “I sell sneakers.” We got the opportunity to sit down with this down-to-earth, Harvard Business School-educated, part-Native American straight-talker from Texas, who shared with us his views on the athletic footwear business, the economy, global opportunities, and what it takes to be a power retailer in today’s competitive environment.

Q. Ken, you’ve been at the helm of Foot Locker (FL) for almost 2 years now, during which sales rebounded to $4.8 billion and then $5 billion, after having declined for the prior four years, and net income more than doubled. How did you achieve this turnaround, and what challenges and opportunities do you see for the year or two ahead?

A. Matt [former CEO Matt Serra] had done a very good job positioning the company to be safe and secure with a sound financial base. The problem was, merchandise-wise, we had allowed ourselves to get too finite. We’d moved into too much basketball. Our customer profile had gotten more and more narrow – minority male between the ages of 15-25, so we had a much smaller customer base and when the downturn came, that customer base got hit the hardest by unemployment, so we were in a challenging time.

Sales dropped by about a billion dollars, we had to close stores, and then the team sat down and we came up with a strategic plan that would allow us to grow. We set a vision to be the leading global retailer of athletically-inspired shoes and apparel. We needed to go back to being the place to go for sneakers. So the vision was important… global was important, and we decided we’re going to be athletically inspired, we’re going to be shoes and apparel, and we’re going to be a retailer.

Q. How did you go about achieving that?

A. We developed six strategies. First one was to be a power merchandiser, to be very good at what we do. There were some things we were doing a little bit here and a little bit there, but now we were going to be really powerful, we were going to be focused. Also we’re going to develop a distinct positioning for each of our brand banners. We had several banners but they had all moved to the same place, so we needed to differentiate. We had three stores all competing in the same mall. One of the reasons we’re having this success in the US is that we’ve differentiated our banners and appealed to a broader customer base than we had.

The third strategy was to develop a more compelling apparel assortment. While apparel is a minority of our business, it was about half the drop that we had. We were selling $5 polos, which we shouldn’t have been doing. Walmart (WMT) doesn’t sell five-dollar polos.

Q. Why in the world did you want to go deeper into apparel?

A. For several reasons. One, sales growth; it’s an opportunity. And, people buy apparel more frequently than shoes, so it attracts people to the stores more often. Two, it’s a natural add-on to the business, so as I sell a pair of shoes, here’s a hat that goes with it, here’s a shirt that goes with it. Third, it helped us a lot with running shoes. Running was one of the businesses that we wanted to step up, so to speak. If you bought a pair of running shoes from us, but we didn’t have running shorts, so you had to go to a competitor, then why not just go to the competitor and buy the shoes and the shorts in the same place? So, it helps us sell more shoes.

As you walk by the store, the thing that defines the banner that you can see easily is the apparel. I walk by a Foot Locker, I see more performance apparel. I walk by a Champs, I see the NBA stuff in the store. I walk by the FootAction store, I see “Jordan” or some “Levi’s Jeans,” I see something up there that changes more frequently than the shoes and is more visible than shoes. I can only put so many shoes into the store, and it would look kind of strange because with the shoes on the wall, I wouldn’t have anything in the middle of the store, so it helps me utilize the real estate that I have. It allows me to accommodate the customers and give them service. And, finally, it should be a higher margin than branded shoes – it wasn’t, which was one of the challenges we had. The apparel margin was less than the shoe margin. We weren’t turning apparel; and the apparel we had was very inexpensive stuff. We’ve upped the quality, and are selling it for higher prices. We’re turning it faster, and doing a better job replenishing it.

A. It definitely helped. The problem was we didn’t have any apparel merchants, so we went out and hired people who knew apparel. We had shoe people trying to do apparel. The expression I use is “we always wanted to do apparel in the worst way, and we did.” We had to figure out how to do it right. Last quarter apparel sales grew by over 20%. The fourth strategy is to make our stores and Internet sites exciting and engaging places to shop, to improve the customer experience.

Q. As you know, I am very big on the customer experience. Explain that a little.

A. Well, for instance, in House of Hoops, it’s very inviting We have a basketball floor, great product, using great ideas; we’re putting more mannequins to show how things go together and make it more exciting. At this Foot Locker in Toronto, we’ve got our visible wall, which has all the shoes to show that we’ve got a lot of shoes. At Lady and Champs, we’re showing a lot more apparel and how things go together. But I think the most important thing is to have great product, so we work with our vendors to have new exciting products, exclusive products, and to have great service through the associates.

Q. Do you have formalized training programs for the associates?

A. Yes, we work with the vendors to develop them, we use videos primarily, things like snaptags where you take your phone, take a picture of a barcode and it pulls up a message, talks about the shoe. We just introduced two new websites, one of them is Sneakerpedia, a blogger site for sneaker enthusiasts, and the other is Striperpedia, an information site, that answers questions like “OK, if I pronate, what would be a good shoe for me?” We also have ratings for shoes. We are one of the few stores in the mall that has people. We had to take advantage of having people there to sell, to make it an interesting, exciting place to shop. The fifth strategy involved growth opportunities. We’ve got a 3,400-store base, and if we grow each a little bit, even 3-4%, that’s a big number. We’ve got international as a growth opportunity, which was up 20%. Internet is a big opportunity. Our goal is to get each of the websites (footlocker.com, Champs.com) to be 10% of each of the banner’s business. We’ve got new ideas. House of Hoops – we plan to have over 40 by the end of this year. We’ve got a prototype of a Run store – we have a freestanding one in Union Station, a store within a store across from the Empire State Building, and a mall store at Menlo Park. That business is a reasonably small business, whose purpose is really to learn a lot about running, to benefit the 3,400 Foot Locker stores.

And the last strategy is continuing to build on the strong team that we have. I think we’ve made progress there, but like anything else, that’s never done.

Q. Do you see the Foot Locker brand out of the whole enterprise as being the growth engine?

A. I see Foot Locker providing significant growth. We also have a Lady Foot Locker and a Kids Foot Locker in the US; we also have Foot Locker in Europe, Canada, and Asia Pacific, and we’ve got a couple franchises in the Middle East and Korea. We do 20% of our business overseas. People look at Foot Locker and think it’s this big behemoth, but we look at them as different divisions and franchises, each positioned differently.

Take Foot Locker Europe. We have over 500 stores, we think we can go up by 50% in the next four or five years. We have opportunity globally because we’re not limited, we can tailor the offering to the market. In Italy, it’s all about fashion, in France it’s more basketball, in Germany, much more performance.

Q. Do you think the price increases everybody’s talking about are going to stick? How hard do you think the inflation is going to hit Foot Locker?

A. It’s going to have an impact. For us, though, the question will be “Will the higher prices offset the lower units?” We haven’t seen all the price increases for next year yet. But what we’ve learned from the vendors is that they’ll be thoughtfully implemented, rather than just “OK, we’re going to raise all prices x%.” Remember, most of the people have never seen the product before; it’s not like gas, a commodity, where people say, I bought gas last week, I know when the price went up. And gas is gas. But new exciting product that’s the other thing, it’s something new and different. Many of our customers are minority and moderate income customers, where we’re their special thing; we’re their luxury. Maybe they’ll forego a movie or going out to eat to buy the sneaker. It’s about newness and excitement. Whether they pay $140 or $150 for a pair of (Nike – NKE) foamposites isn’t a function of the price of the shoe. It’s a function of do I have about $150? I’m not as concerned about cost increases as I would be if I were still at Penney’s.

We work with our vendors on exclusive styles and colors. We have athletes like Kobe Bryant come for events for Footlocker and House of Hoops. We did a shoe with Taboo of the Black-Eyed Peas for Footaction, which has a more street customer. We had a launch last week, and there was a line outside the store.

The newness coupled with a tie to sports is a real draw to our customer. We are the Louis Vuitton (LVMH) or Tiffany’s of Middle America. They say “I want something special. I’m going to buy a pair of Adidas.”

Q. Well the fad items, like toning shoes, and Crocs; is there anything out there that you think will impact the industry?

A. The big thing now is lightweight running. The shoes I’m wearing and the Lunars or the Frees from Nike, the Flex from Reebok – everyone’s got lightweight running. When I talked to one of the experts from the industry he said “64% of the running shoes are bought with the express intent to not be run in.” I think light running has huge potential because first of all, it’s much more practical; second, it serves a purpose, and not just running. It’s portable, functional, comfortable and cost-effective. You can roll them up and pack them more easily, which makes them very appealing to women. Toning got a little outsized – it will be 8 or 9% of the business, not 20%, like some people thought.

Q. What are the top-selling footwear brands that you have?

A. Nike, Adidas, Reebok, and Asics. Since basketball was so big, we were underpenetrated in the technical running. But now we have the Mizuno, Asics and Brooks that we should.

Q. How does the health of the different professional sports league affect it?

A. Now that the NFL problem is solved, I’m concerned with the NBA. First of all, we sell more basketball shoes; second, it’s much more personality-driven than football. There are a lot of people in football, but you don’t have a Lebron, or Dwayne, Walls, or Michael Jordan. So, we’re working with the vendors, developing contingency plans to try and work with it; it’d be naïve to say there’s no impact, but I think we’re working to try and manage around it if there is a strike.

Q. So the whole enterprise is about 3,400 stores, and the largest close-in-kind competitor Finish Line, but you also compete with big box and Zappos?

A. Finish Line is a good competitor. We also compete with Dick’s (DKS) Sporting Goods. Zappos (division of Amazon – AMZN) sells sneakers, but it’s not a sports company, it’s much more female than male, and we’re much more male-oriented with the exception of Lady, and sneakers are a side business for Zappos. They sell shoes, some of which happen to be athletic. People who look to buy athletic shoes other than just for pure foot covering, saying “I want to know something about the people I’m buying them from, I want to know that they’re good shoes.” They know we stand by them.

Q. What are the biggest competitive challenges for you over the next few years?

A. Well, the biggest challenge of course is the economy. I don’t think the recession’s over, but I do think we’ve learned to live at the bottom. Hopefully, we will come out of it at some point. One thing that’s helped so far is the FICA tax reductions. Every person got an extra 2%. So if you’re making $60,000 a year, $5,000 a month, you’ve got an extra $100. The problem is that goes off at the end of this year. So then it will look like you’re making $100 less a month. I’m definitely concerned about the economy.

But I’ll buckle my chinstrap and go up against anybody and compete, and compete well. Like the old joke about the two guys in the woods, and they see the bear, and the one guy starts tying his shoelace. We’ll outrun the other guy.